Haves and Have Less—Why Inequality Throws Us Off Balance

We used to think that overall economic growth would pull everyone up. While the rich might be getting richer, everyone would benefit and would see higher living standards. That was the unspoken bargain of the market system.

But now research is showing that, in many countries, inequality is on the rise and the gap between the rich and the poor is widening, particularly over the past quarter-century.

With taxpayers footing the bill for troubles in the financial industry in advanced economies during the global economic crisis, this discrepancy seems particularly galling to wage-earners who have seen their pay stagnate or worse. Inequality has started to attract more research by economists.

The September 2011 issue of Finance & Development (F&D) looks at income inequality around the world and how it matters.

Small group of winners

The world has seen an unprecedented era of economic growth over the past decades, which has made people better off, on average. But overall the rich have done much better than the poor. According to the Organization for Economic Cooperation and Development (OECD), growing inequality breeds social resentment and generates political instability. It also fuels populist, protectionist, and anti-globalization sentiments. “People will no longer support open trade and free markets if they feel that they are losing out while a small group of winners is getting richer and richer,” says Angel Gurría, the OECD Secretary-General.

According to Branko Milanovic, a lead economist at the World Bank who wrote the cover article, the global economic crisis may have narrowed global inequality somewhat between people around the world because most emerging and developing economies continued to maintain strong growth. Milanovic explains his research in this podcast.

Don’t brake too fast

The Painful Medicine of fiscal adjustment in some advanced economies can add to these inequality woes. With debate on the pace of fiscal adjustment looming large in many advanced economies, the article by Laurence Ball, Daniel Leigh, and Prakash Loungani is already drawing high profile attention—including from Paul Krugman, the Washington Post, and Huffington Post—for the finding that slamming on the budget brakes too quickly will hurt incomes and job prospects.

Finance & Development is a quarterly magazine of the IMF, publishing analysis of issues related to the international financial system, monetary policy, economic development, poverty reduction, and other world economic issues. The print and web editions are published quarterly in English, Arabic, Chinese, French, Russian, and Spanish.